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After Soaring, Can Restoration Hardware Reach New Heights?

One of the biggest stock market movers on March 28 was Restoration Hardware (NYSE: RH) . The home-furnishing retailer reported revenue that fell shy of forecasts and earnings that matched analyst estimates. Shares soared 12% on an outlook that suggests the business has a great deal of room to run. In spite of the company's mediocre results and in light of management's rosy forecast, should the Foolish investor consider taking a stake in the company? Or have shares risen too far, too fast for an investment to make sense?

Restoration Hardware's revenue growth was far from greatFor the quarter, Restoration Hardware reported revenue of $471.7 million. This represents an 18% jump compared to the $398.1 million achieved in the year-ago quarter. After subtracting the extra week of operations the business enjoyed last year, revenue rose an even more impressive 26% from a base of $374.1 million; results still fell shy of the $496 million analysts expected.

In its report, management attributed the sales increase to a 17% jump in comparable-store sales and a 24% increase in the business' comparable-brand growth. Another driver behind the company's top-line growth was the addition of four outlet stores, partially offset by the closure of one retail location.

While this improvement was impressive, it fell short of another specialty retailer: Lumber Liquidators (NYSE: LL) . In the fourth quarter of its 2013 fiscal year, Lumber Liquidators saw its revenue rise 23% from $210.7 million to $258.4 million, easily beating the $255.7 million Mr. Market anticipated.

According to management, revenue increased amid a 10% rise in the number of locations in operation, from 288 to 318, over the past year as well as strong growth in comparable-store sales. For the quarter, Lumber Liquidators saw its comparable-store sales jump 16%, driven largely by a 9% rise in traffic and a 7% increase in basket size.

Another specialty retailer that investors should consider is The Container Store Group (NYSE: TCS) . For its most recent quarter, the company saw revenue rise 7% from $175.4 million to $188.3 million; this fell short of the $188.9 million investors hoped to see. But management was pleased with the 4.7% increase in comparable-store sales as well as the business' two new locations for the quarter, bringing its total store count to 63.

Earnings were stronger but nothing special!When it came to revenue growth, both Restoration Hardware and The Container Store fell short of forecasts, while Lumber Liquidators surprised its shareholders. Looking at this data alone, shareholders might be inclined to dismiss Restoration Hardware as an attractive opportunity. But would this be a mistake without first seeing how its earnings performance compares to that of its peers?

During its most recent quarter, the company reported adjusted earnings per share of $0.83. This represents a 30% jump compared to the $0.64 the business reported in the year-ago quarter and fell in-line with analyst estimates.

According to the company's earnings release, the jump in profits came about because of higher sales but was also attributed to a decrease in the cost structure. The largest improvement Restoration Hardware reported was in its selling, general, and administrative expenses, which fell from 58.7% of sales to 24.7%. After excluding special compensation granted to the company's management team and owners in 2012, SG&A expenses fell only 2.2% from 26.9% of sales to the 24.7% the company reported for its 2013 fiscal year.

After accounting for certain one-time expenses, The Container Store performed better than Restoration Hardware, delivering earnings of $0.11 per share. This matched what the company earned a year earlier and beat the $0.08 per share analysts hoped to see.

The Container Store management chalked up bottom-line performance to declining expenses, with SG&A expenses falling from 40.6% of sales to 40%; pre-opening costs and restructuring charges also fell.

The best performer of the group, however, was Lumber Liquidators. For the quarter, the company reported earnings per share of $0.74. This was a whopping 48% higher than the $0.50 per share earned a year earlier. Results beat analyst estimates by $0.02.

On top of benefiting from rising sales, the company saw its new product sales fall, which decreased its cost of goods sold from 60.9% of sales to 59.2%. This was partially offset by higher SG&A expenses due to the start-up of its West Coast distribution center.

Foolish takeawayBased on the data provided, Restoration Hardware had a mediocre quarter, similar to how The Container Store fared during its third quarter. Meanwhile, Lumber Liquidators saw the greatest level of improvement. If it were for this reason alone, shares of Restoration Hardware might not be up so much. But there is one thing saving it: Management provided a very nice forecast.

In its first quarter of 2014, the company expects to report revenue of $345 million to $350 million and adjusted earnings per share of $0.09 to $0.11. This is far better than the $301.3 million in sales and $0.06 in adjusted earnings per share the company reported in the same quarter of 2013.

Given the positive outlook, it looks like shareholders are overlooking the company's performance for the quarter and giving management the benefit of the doubt. If the company is right about the way it will perform moving forward, it could provide shareholders with attractive upside. But any negative revision by management could force shares to drop just as quickly as they rose.

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You are comparing a high end furniture store with a millionaire customer base to a discount flooring supplier and a container shop? These businesses have nothing in common whatsoever other than being listed as publicly traded companies.

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Dan is a Select Freelance writer for The Motley Fool. He focuses primarily on the Consumer Goods sector but also likes to dive in on interesting topics involving energy, industrials, and macroeconomics!